Econ Exam 1

Front 1

Economics definition

Back 1

Social sciencestudying how individual institutions and society make choices given scarceresources

Front 2

Scarcity

Back 2

limited resources and unlimited wants

Front 3

Opportunity cost

Back 3

value of what must be given up ‘value of thenext best alternative’

Front 4

Rational self-interest

Back 4

individualsmaking purposeful choices to maximize utility

Front 5

Utility

Back 5

measure of satisfaction enjoyment or happiness

Front 6

Marginal analysis

Back 6

economics examines decisions at the margin

Front 7

Scientific method

Back 7

1. Observe realworld outcomes

2. Formulatehypothesis

3. Test hypothesis

4. Accept, reject,or modify hypothesis

5. Well testhypothesis becomes economic theory

Front 8

Economic models

Back 8

economic models simplify reality while retainingkey features

Front 9

Microeconomics

Back 9

small scale economics choices behavior ofindividual consumers, firms and how they interact with the market

Front 10

Macroeconomics

Back 10

large scale economics, choices behavior andperformance of economy as a whole.

Front 11

Positive

Back 11

describes the world as it is, fact, true/false

Front 12

Normative

Back 12

describes how the world should be, opinion

Front 13

Individual’s economizing problem

Back 13

unlimited wants -> with limited resources/income

-> leads to choices/tradeoffs

Front 14

Production possibilities curve

Back 14

assumes fixedresources, full employment of resources, fixed production of technology, twogoods

Front 15

Law of increasing opportunity cost

Back 15

opportunity costs increase as production of agood or service increases

Front 16

3 economic systems

Back 16

Laisse Faire Capitalism (pure capitalism)

Command System

Market System

Front 17

laisse faire capitalism (pure capitalism)

Back 17

government role is only establishing + enforcingproperty rights + contracts

Front 18

command system

Back 18

government owns most of the resources, centralplanner makes all the decisions

Front 19

market system

Back 19

capitalism, mixed economy, the government stepsin to fix market failures, there is decentralized decision making, individualsact in self interest

Front 20

Invisible hand

Back 20

the unobservablemarket force that helps the demand and supply in a free market to reachequilibrium automatically

Front 21

Circular flow model

Back 21

Idk look at pic

Front 22

Market

Back 22

any place ofexchange for buyers and sellers

Front 23

Demand

Back 23

amount of goods and services consumers arewilling and able to purchase at various prices

Front 24

Law of demand:

Back 24

all else equal, as price increases our quantityand demand decrease, and vice versa

Front 25

Diminishing marginal utility

Back 25

as we consume additional units of a good theutility gained becomes less and less (the more you consume of something theless joy it brings you)

Front 26

Income effect

Back 26

lower price increases purchasing power andallows more consumption of goods and services. Higher prices will decreasepurchasing power and lead to lower consumption of goods and services.

Front 27

Substitution effect

Back 27

lower price causes consumers to substitute awayfrom relatively more expensive goods in favor of less expensive goods

Front 28

Determinants of demand

Back 28

i. If incomeincreases demand will also increase

ii. Consumertastes and preferences iii. If number ofbuyers increases the demand will also increase

Front 29

Supply

Back 29

amount producers are willing and able to sell atvarious prices

Front 30

Law of supply

Back 30

all elseequal, an increase in price results in an increase in quantity supplied. Inother words, there is a direct relationship between price and quantity:quantities respond in the same direction as price changes.

Front 31

Determinants of supply

Back 31

i. Technology

ii. Taxes and subsides iii. Prices of related goods

iv. Producer expectations

v. Number of sellers

Front 32

Market equilibrium

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i. Surplus: excessquantity supplied

ii. Shortage:excess quantity demanded

iii. Price floor, price ceiling: market cannot be below the floor or above the ceiling

Front 33

Comparative advantage

Back 33

ability toproduce at a lower opportunity cost

Front 34

Absolute advantage

Back 34

ability to produce using fewer resources

Front 35

Principle of comparative advantage

Back 35

total output is maximized when each good isproduced by producer with comparative advantage in that good

Front 36

Terms of trade

Back 36

ratio at which two countries exchange goods

Front 37

Trading possibilities line

Back 37

combinations of goods possible by specializingin good with comparative advantage in trading

Front 38

Gains from trade

Back 38

increase in output from specializing and trading

Front 39

Trade barriers

Back 39

i. Tariff- taxon imported goods

ii. Import quota- limit on the number of goods with a lower opportunity cost imported iii. Non-tariff barrier- licensing requirement, unreasonable qualitystandards, bureaucratic delay

iv. Export subsidy

Front 40

Cases for protection

Back 40

1. Military self-sufficiency

2. Diversification for stability

3. Infant Industry

4. Anti-Dumping

5. Increased domestic employment

6. Cheap foreign labor

Front 41

Demand side market failure

Back 41

demand curve not reflective of consumer’swillingness to pay (WTP)

Front 42

Supply side market failure

Back 42

supply curve not reflective of costs ofproduction

Front 43

Market efficiency

Back 43

1. consumer surplus: their WTP minus the amount they actually pay

2. producersurplus: price minimum minus priceproducers will pay

3. total surplus=consumer surplus + producer surplus

Front 44

Productive efficiency

Back 44

Productive efficiency is concerned withproducing goods and services with the optimal combination of inputs to producemaximum output for the minimum cost.

Front 45

Allocative efficiency

Back 45

Occurs when there is an optimal distribution ofgoods and services, taking into account consumer’s preferences.

Front 46

Deadweight loss

Back 46

by altering the supply and demand of a goodthrough price manipulation. In order to calculate deadweight loss, you need toknow the change in price and the change in quantity demanded. The formula tomake the calculation is: Deadweight Loss = .5 * (P2 - P1) * (Q1 - Q2).

Front 47

Public goods

Back 47

1. Non-rivalrous-one person’s consumption of the good does not prevent anothers consumption

2. Non excludable-there is no effective way to prevent someone from benefiting from this good

Front 48

Free rider problem

Back 48

investment with a personal cost but a commonbenefit leads to under provision

Front 49

Externalities

Back 49

market transactions that impose a cost/benefiton an uninvolved third party

Front 50

Price elasticity of demand

Back 50

i. Impact on total revenue

ii. Determinants of price elasticity of demand